Bob Diamond: the case for the defence

Bob Diamond, in his first interview since being named the new Barclays chief
executive, talks about 'casino banks’, huge pay packages and his future
plans.

Meet Bob Diamond and it does not take long to realise he is nothing like the caricature painted by politicians. He speaks quietly and picks his words with care.

By Kamal Ahmed

7:03AM BST 13 Sep 2010

Like his beloved Chelsea, Bob Diamond knows that being overly successful does not always bring praise. When that success appears relentless, sharp-elbowed, a given, year after year whatever the chaos around you, people start becoming suspicious.

Since the credit crisis of 2007, Diamond’s name has become something of a metaphor for all things controversial in banking. His multi-million pound remuneration, the Barclays Capital deal to buy Lehman Brothers, the huge injection of capital from Middle Eastern sovereign wealth funds, the significant profits. He has been blamed for being brash, being a deal-maker and, possibly worst of all, guilty of the offence of running a bank while American.

Then came the news last week that Diamond was to step up from being president of Barclays and heading Barclays Capital to become chief executive of one of the UK’s most successful banks – a success he is largely credited with creating.

In that one announcement the whole debate about the future of Britain’s financial sector appeared to crystalise. Diamond, the investment banker, would take over from John Varley, the present chief executive – a man regularly described as a statesman in the financial world, owlish, considered and not at all brash. And every time Varley – who is even conveniently married to a scion of the Barclays family – is described in such terms, there is the tacit nod from the critics that Diamond is, well, the opposite.

Lord Oakeshott, the Liberal Democrat Treasury spokesman and a man known to be close to Vince Cable, the business secretary, described the appointment in less than glowing terms: “He’s a great gambler but he has no experience of retail banking. Barclays should be demerged. We have pledged to tackle unacceptable bonuses and reduce risk and 'Bonus Bob’ Diamond personifies both of those things.”

Even satirical comic Viz, not previously known for its financial coverage, helpfully suggested in its Top Tips section: “Barclays: make more of your casino banking ethos by combining cash machines with fruit machines.”

Ho ho. In Barclays they have a nickname for Lord Oakeshott, prefaced with a reference to his being, you know, unelected. Lord Overshoot.

Meet Diamond, of course, and it does not take long to realise he is nothing like the caricature. He speaks quietly and picks his words with care. He knows he is not just a banker any more. With the new job he is now part-politician, a figure to be judged in the court of public opinion.

Need for caution

Diamond talks about his history with Barclays since joining in 1996. He talks about the banking commission which will consider whether the UK’s universal banks – joined together in investment and retail operations, such as Barclays – should be split apart. He talks of Basel III and the headwinds of new regulation, and the need to create a better balance at Barclays between the profits made by its investment and retail arms. He talks about pay and the need for caution, about casino banks and the “disappointment” he feels at the level of some of the debate. And when Diamond says “disappointment”, you know he means a whole lot more.

As he speaks, a bird thuds straight into his glass-fronted office at North Colonnade, Canary Wharf. “Boy, that’s gotta hurt,” Diamond says.

'I think it is important that we are able to talk about this in a serious way.” Diamond pauses as he considers what has become the most toxic of the many issues surrounding him - remuneration. In 2009 his remuneration package was worth £18.2m and his new CEO package could be as much as £11.5m a year. With the sale of shareholdings and the maturing of long-term incentive plans, it is believed Diamond has earned more than £100m over the past four years.

Before the election, Lord Mandelson described him as the “unacceptable face of banking”, although interestingly the former business secretary has been silent on Diamond’s appointment. In the past two years Diamond has not taken a bonus, despite Barclays Capital being in rude financial health.

Diamond knows that the next remuneration round, spring 2011, will come as possibly thousands of public-sector workers will be getting their redundancy notices.

“That is why we have to be very sensitive to the timing and the public mood,” Diamond said. “And sensitive to the fact that we have to balance what is right for the shareholder, what is right for our clients, what’s right for the regulators, what’s right for the communities we live in and what’s right for our people.

“That’s a balance we have to strike in everything we do, including remuneration.”

Politics and perception

Does he fear the politics of the situation mean the Government will feel obliged to try to control top bankers’ pay?

“It is still an issue,” he says. “We have to make sure there are not extremes on either side. If the UK decides to do something aggressive, businesses will go abroad.

“The hard thing would be if some countries had rules and some countries did not, because of the domino effect.”

He says that much has already changed. “Barclays was one of the first to endorse the FSA and G20 guidelines [on remuneration control]. John [Varley] has also said that it is not going to benefit anyone that there are isolated national initiatives that create a movement of businesses.

“There should be a level playing field and consistency. I believe in pay for performance, and I think we also have to be very conscious of the public attitude right now.”

Speaking to other senior figures within the bank, it appears Barclays now regrets simply waiving Varley’s and Diamond’s bonuses last year. This year they are considering plans to award the bonuses and allow Diamond and others to turn them down or, as other executives such as HSBC’s Michael Geoghegan did, give them to charity.

Splitting up banks

As group CEO, Diamond will now play a much more prominent role in the debate surrounding Sir John Vickers’ banking commission, set up by George Osborne to consider the future structure of the UK’s finance sector.

HSBC and Standard Chartered have already suggested that if the commission decides that a break-up is necessary, a move of headquarters out of London would be on the cards. Cable has said while in government that “the direction of travel is clear” towards splitting up the banks and has privately told colleagues that he will “not be blackmailed” by banks threatening to move before the commission concludes.

Is Diamond also considering moving? “We have respect for the Government and respect for the commission,” he says carefully. “This commission was set up by an act of Parliament and we are going to take it very seriously and very professionally.

“We are doing whatever we can to give information to the commission. Ultimately they will make a decision that is in the best interests of the United Kingdom. We support that.

“We have a very strong view that our business model fits exactly what is the right model for the UK. But we have total respect for the process and the committee. We are going to work with them and engage.” One of the members of the committee, Martin Taylor, recruited Diamond to Barclays when he was CEO.

“There will be some noise during the process,” Diamond said. “We will hear drama from people that have a vested interest. We will hear words like 'casino banking’ that have no basis in reality and generally come from people that don’t understand what a bank does and how important risk is in terms of the business we do with our clients.

“What I’ve said to the staff is recognise that this is a process and trust that John and I are engaged.”

Relocation, relocation, relocation

Does he agree with Stuart Gulliver, the head of HSBC’s investment arm and tipped as its possible next CEO, that a split will hasten moves abroad?

“I think to make comments in any other area than I just did would suggest that I didn’t believe what I just said – which is that we will engage.”

Many believe that Diamond, the deal-making, tough-talking Yankee investment banker, will find it hard to negotiate the UK’s political minefield on this issue. In response, Barclays’ new CEO details the process he has just been through in America, where BarCap is one of the top five investment banks.

The passage of the Dodd-Frank bill controlling the type of trading banks can do was a hyper-political issue finally agreed earlier this year.

“I was proud that I was one of three bankers invited to the signing [of the bill] by President Obama,” Diamond said.

“I feel I represented Barclays well in saying that strong banks want strong regulation. So many people have said that banks don’t want strong regulation, that is just not right. No one was more upset at the failure of certain banks than those of us that didn’t fail, didn’t take government money.

“Strong regulation should be in place to prevent any opportunity for the taxpayer to ever have to put money into banks again. We support that.

“Through the process [in America] we didn’t agree with every single thing but we worked constructively with the White House, with Congress: I was down on Capitol Hill 20 times this year.

“We poured ourselves in, to help us get to the right decision. My North Star, my guiding light was that we need to balance a safe and sound banking system, that is critical, with the need for economic growth and job creation.

“If we go too far on either side, if there is a knee-jerk reaction on regulation that doesn’t allow banks to take risk or creates a very high cost of credit, it will choke off the economy and job creation. On the other hand, we cannot allow failures that have happened in the past again. In the UK [where Varley has led the discussion on regulation] John has taken exactly that position.”

Big Apple a temptation?

Arguments have been put forward that, as an American and an investment banker, a move to New York would be much easier under his tenure than it would have been under Varley’s.

“I don’t want to get into that,” Diamond said. “I’m not going to respond to people speculating what we will or won’t do.” Are you committed to London? “Yes,” Diamond laughs incredulously. “Since 1690!”

He pauses. “There is no empirical evidence that big is bad or big is risky. The reason that Barclays is a bigger bank than it was 10 years ago is because our clients are.

“The City of London has been the centre of foreign exchange and cross-border trade since, well, forever. And the City of London should have a financial centre, and the City of London should have both UK corporates, and international corporates that can manage their risks, transfer capital and invest capital on a global basis. And that is why banks like Barclays service those clients.”

This weekend will see the announcement of the final Basel III proposals on capital requirements for banks worldwide. Diamond says the key is, once again, ensuring a level playing field to protect against regulatory arbitrage. He points out that the US has yet to fully implement Basel II.

“We now have an opportunity to have the G20 adopt similar capital guidelines and similar timeframes so that we can have a more level playing field.

“Now, it’s not going to be exactly the same in every country, but it has to be broadly similar. There is more recognition that we have to look at the aggregate impact of all the different regulations around capital and we really need to have Basel III equalise those and give a timeframe that allows all the countries [to comply] – I would rather see clarity and a clear direction of where we want to be and a longer timeframe to implement it than have a watered-down solution now.”

Retail vs investment banking

What about the future direction of Barclays itself – is the retail arm really safe in the hands of a man with investment banking in his blood? Actually, as Diamond points, he has long had a role much broader than simply BarCap.

“John asked me last year to take responsibility for the commercial banking activities and a number of group wide functions,” Diamond said.

“I’ve been responsible for talent for four or five years and I also have all of the HR functions, all the reputation and brand and all the corporate communications. In many ways, John has done a terrific job in making sure I had access to all the things outside of my comfort zone and was putting me in areas he knew I could have an impact on.”

Beyond that, the corporate culture of Barclays has also changed, Diamond says, meaning divisions share more with each other. The 1990s were a different story.

“The executive committee at the time, it was like the mafiosi in Chicago in the Fifties. Everyone comes in with their territories, they don’t say a single word that they don’t have to say and their whole modus operandi at the time was to not lose any of their territory and if they were lucky steal a bit of someone else’s territory.

“They weren’t integrated, collegiate, it was very much the factions sitting around the table for a couple of hours a week. I found it very frustrating. We had to learn to work together and become more integrated.”

He says that atmosphere has now changed, that battles are fought in the open, not in the corridors outside.

“There should be tension within all businesses,” Diamond says of critics who say that the different cultures of risk-taking investment banking and risk-averse retail banking are too wide to bridge.

“My philosophy is it should be open, it should be honest and confrontation is OK. As long as it is all in a spirit of what is best for the firm and what’s best for the shareholder. I openly encourage confrontation, but I don’t want it behind people’s back.”

Changes needed

Asked about where his priorities lie for Barclays, he makes it clear he does not believe that parts of its business are up to scratch. Although he doesn’t use the “one-third” target used by Varley when discussing the correct balance between BarCaps profits and the rest of the business (BarCap is at present providing up to 80pc of profits), he says there will be a focus on the commercial and retail divisions and their profit profile, while still allowing BarCap to expand.

“We have been through a very difficult cycle, for the wholesale business it has recovered, whereas for the retail side it has had significantly higher provisions. And, if we are being honest with ourselves, we have under-performed in some of the businesses.

“Our commercial banking activities outside the UK have not performed particularly well – Iberia is a good example. We will continue to fix that.

“Part of it is the cycle – we will lower provisions and so more profit will come in the retail business. The second part is execution. In the UK and Ireland, in commercial banking, [we are] second to none.

“We are not like that outside [those territories]. We are aligning that business much more closely with Barclays Capital so that our small and medium enterprise clients – not just in the UK but in Germany, France, Spain, Portugal – have access to the expertise around products and solutions and funding to manage their risk that Barclays Capital can bring.

“In global retail we are not yet in the top position in some of the areas of western Europe, where we are fine, but we have to say we are not operating in the top tier.”

He thinks back to his earlier years at BarCap when it was something of an also-ran. “When you look at Barclays Capital, we were 25th in the world in global foreign exchange. We’re Barclays! How could we be 25th in the world?”

Deals in the pipeline

BarCap, with the Lehman acquisition, is now comfortably in the top tier. Commercial, wealth and retail will now have a similar focus – although he seems cool on any speculation on US retail expansion. Other acquisitions are possible if Barclays can get assets at the right price.

“These aren’t casino businesses, these are real, client-driven businesses,” he said. “We are providing services to corporate clients, to fund managers, to retail clients through branch banking and high net-worth banking.

“It’s disappointing when we hear reference that banks are casinos. It’s disappointing when we hear reference that Barclays Capital is a casino – we closed down our proprietary trading in 1998. It is just not right to use a phrase like that to encompass investment banking or banking. It is not based on fact and it creates the wrong impression.

“Which is not to say that we have not made mistakes – we have been through a very difficult period. And banks have learned their lesson – we are carrying much higher levels of equity, much higher quality, we are using less leverage and we are driving bigger pools of cash and liquidity on the balance sheet. We have transformed the way we operate in Barclays.”

Diamond knows he will be under a spotlight – the US investment banker heading one of the leading UK banks. Not everyone will love him – just as not everyone loves Chelsea.